The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property, reversing what would have been a complete phase-out by 2027. For rental property investors using platforms like mogul, this may create tax advantages when the resulting deductions can be used. However, the rules are nuanced: bonus depreciation applies only to certain property components, not the building structure itself, and passive activity limitations affect when most investors can actually use these deductions.
Disclaimer: The information provided in this guide is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult with a licensed professional before making any financial or investment decisions.
Key Takeaways
The OBBBA made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025, eliminating the scheduled phase-down that would have reduced rates to 0% by 2027
For rental properties, qualifying components generally include property with MACRS recovery periods of 20 years or less. Residential buildings (27.5-year property) do NOT qualify for bonus depreciation
Cost segregation studies can reclassify portions of a property's depreciable basis into accelerated depreciation categories, potentially increasing early-year deductions to $200,000+ on a $1 million property, depending on the placed-in-service date
Rental real estate is classified as a passive activity by default, meaning depreciation losses generally offset passive income unless an applicable allowance or exception applies, such as real estate professional status (more than 750 hours annually) with material participation or a qualifying short-term rental with material participation
Depreciation reduces adjusted basis and can affect taxation at sale. Bonus depreciation accelerates deductions into earlier years, with some recognized gain potentially taxed as ordinary income upon disposition
Understanding Bonus Depreciation for Rental Property in 2027
What is Bonus Depreciation?
Bonus depreciation is a federal tax incentive that allows rental property investors to immediately deduct a significant percentage of qualifying asset costs in the first year of service, rather than spreading deductions over the asset's useful life. Under the Modified Accelerated Cost Recovery System (MACRS), standard depreciation for residential rental buildings requires spreading deductions over 27.5 years. Bonus depreciation accelerates this timeline for qualifying components.
Bonus depreciation encourages investment in tangible property by front-loading tax benefits. For rental property investors, this may reduce current-year tax payments when deductions can be used, freeing cash for reinvestment into additional properties.
How Bonus Depreciation Applies to Rental Real Estate
The critical distinction for rental property owners involves understanding what qualifies versus what does not:
Qualifying property (eligible for 100% bonus depreciation):
Appliances, furniture, and carpeting (5-year property)
Land improvements such as parking lots, fencing, and landscaping (15-year property)
Certain building components identified through cost segregation studies
Any tangible personal property with a MACRS recovery period of 20 years or less
Non-qualifying property:
Residential rental buildings (27.5-year property)
Commercial buildings (39-year property)
Land (not depreciable at all)
A residential rental building does not qualify for bonus depreciation under current IRS rules. This means the structure itself, including the walls, roof, and foundation, must be depreciated using the standard straight-line method over 27.5 years. Only shorter-life components can receive accelerated treatment.
The Bonus Depreciation Phase-Out and Permanent Restoration
The Original Phase-Down Schedule
Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was set to phase down as follows:
2022: 100%
2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 and beyond: 0%
Qualifying assets acquired and placed in service in 2024 generally qualified for 60% bonus depreciation, and those acquired before January 20, 2025 and placed in service in 2025 generally qualified for 40%. This created significant timing pressure for investors attempting to maximize tax benefits before the scheduled elimination.
The 2025 Permanent Restoration
The OBBBA, signed July 4, 2025, fundamentally changed the landscape. The legislation permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. There is no scheduled phase-down under current law.
The critical date matters. A written, binding contract for qualifying property can establish an acquisition date earlier than the closing date. Properties under contract before January 20, 2025, but closing after, may remain subject to the old phase-down rates depending on the specific qualifying assets.
The 2027 Bonus Depreciation Rate
For 2026 and all subsequent years (under current law), the bonus depreciation rate stands at 100% for qualifying property. This provides predictable tax planning for investors and eliminates the need to time acquisitions around phase-down schedules.
Calculating Bonus Depreciation: Real-World Rental Property Examples
Standard Depreciation vs. Bonus Depreciation
Consider a hypothetical $1 million rental property acquired in 2027:
Standard depreciation approach:
Purchase price: $1,000,000
Land allocation: $200,000
Depreciable basis: $800,000
Full-year annual depreciation: $800,000 ÷ 27.5 years = $29,091
First-year deduction depends on placed-in-service month (mid-month convention)
With cost segregation and bonus depreciation:
Same $1,000,000 purchase price and $200,000 land allocation
Cost segregation identifies $200,000 as qualifying shorter-lived property
100% bonus depreciation on $200,000 = $200,000 first-year deduction
Remaining building depreciation: $600,000 ÷ 27.5 = $21,818 per year
Illustrative total: approximately $221,818 (before first-year conventions and individual deduction limitations)
This hypothetical illustrates the difference: a $29,091 full-year standard deduction versus a potential $221,818 with cost segregation and bonus depreciation before first-year conventions. At a 35% federal bracket, the illustrative additional $192,727 deduction could represent approximately $67,455 in potential federal tax savings, but only to the extent the taxpayer can use the deduction. Actual first-year deductions depend on the placed-in-service month.
Impact on Different Rental Strategies
The tax benefits vary by rental approach:
Short-Term Rentals (Airbnb-style):
Higher furnishing costs create more 5-year depreciable property
More qualifying appliances and fixtures
Potential for non-passive classification (covered below)
Long-Term Rentals:
Lower personal property component typically
Standard building depreciation dominates
Cost segregation can still identify 15-year land improvements
Mid-Term Rentals:
Similar to short-term in terms of furnishing requirements
May qualify for non-passive treatment depending on average stay length
Using mogul's investment property calculator, investors can model potential property returns across rental strategies; personal depreciation benefits require separate tax analysis.
The Role of Cost Segregation Studies in Maximizing Benefits
How a Cost Segregation Study Works
A cost segregation study is an engineering-based analysis that identifies and reclassifies building components from 27.5-year or 39-year property into shorter recovery periods. Professional engineers examine the property and allocate costs to specific asset classes:
5-year property: Appliances, carpeting, window treatments, certain fixtures
7-year property: Office furniture, specialized equipment
15-year property: Land improvements including driveways, sidewalks, landscaping, fencing, parking areas
Qualified Improvement Property (QIP): Certain interior improvements to nonresidential real property made after building placement in service
The study produces a detailed report that supports the accelerated deductions on tax returns and provides documentation in case of IRS examination.
Cost Segregation ROI Analysis
The following hypothetical examples assume that 20-35% of stated depreciable basis qualifies for 100% bonus depreciation. Illustrative tax values reflect the bonus deductions at a 35% rate, before comparing with standard depreciation, and assume the taxpayer can use them in the current year:
$500,000 depreciable basis: If 100,000-175,000 qualifies for bonus depreciation, illustrative tax value at 35% bracket: 35,000-61,250
$1,000,000 depreciable basis: If 200,000-350,000 qualifies for bonus depreciation, illustrative tax value at 35% bracket: 70,000-122,500
$2,000,000 depreciable basis: If 400,000-700,000 qualifies for bonus depreciation, illustrative tax value at 35% bracket: 140,000-245,000
Cost segregation study fees range from $5,000 to $15,000+ depending on property value and complexity, with technology-enabled alternatives available at lower price points. The ROI can be substantial when combined with 100% bonus depreciation and the ability to use the resulting deductions.
Lookback Studies for Existing Properties
Investors who own properties acquired without cost segregation can still benefit through "lookback" studies. Using IRS Form 3115, investors can capture missed depreciation without amending prior returns. This creates a one-time catch-up deduction for prior-year missed depreciation plus current-year amounts, subject to applicable accounting method change rules.
Passive Activity Loss Rules: The Critical Limitation
Understanding Passive Classification
Rental real estate is classified as a passive activity by default under IRC Section 469. This has profound implications for bonus depreciation benefits:
Passive losses generally offset passive income, not W-2 wages or other nonpassive income, subject to applicable exceptions
Excess passive losses become "suspended losses" carried forward to future years
Suspended losses can offset future passive income or may be released upon a qualifying fully taxable disposition of the entire activity to an unrelated party
For most fractional investors and individual landlords, this means bonus depreciation creates large paper losses that cannot be immediately used to reduce taxes on employment income. The deduction can still offer a tax-timing benefit, but the immediate cash flow benefit is limited.
Qualifying as a Real Estate Professional
The passive activity limitation can be avoided if you qualify as a real estate professional. Requirements include:
Spending more than 750 hours annually in real estate trades or businesses
More than half of your personal services in trades or businesses must be in real property trades or businesses in which you materially participate
Material participation in each rental activity
Real estate professionals who materially participate in their rental activities may treat those losses as non-passive, potentially allowing bonus depreciation to offset W-2 wages or business income, subject to other tax limitations. However, the IRS heavily scrutinizes these claims, and meticulous time logs documenting actual rental activity are essential.
Short-Term Rental Exception
Properties with average guest stays of 7 days or less may fall outside the default passive rental activity classification. When the investor also materially participates, losses may be nonpassive, subject to other applicable tax limitations.
Material participation requires meeting one of seven tests, including:
Participating in the activity for more than 500 hours during the year
Participating more than 100 hours when no one else participated more
Substantially all participation being performed by the taxpayer
For short-term rental investments, this may create a tax planning opportunity because otherwise eligible bonus depreciation losses may offset W-2 wages when participation and other tax requirements are satisfied.
Depreciation Recapture: The Exit Tax Reality
Understanding Section 1250 and Section 1245 Recapture
When selling rental property, prior depreciation may affect taxable gain and trigger depreciation recapture. The depreciation recapture rules distinguish between two categories:
Section 1250 Property (Real Property):
Standard building depreciation
May be subject to a maximum 25% federal rate on unrecaptured Section 1250 gain
Applies to the 27.5-year depreciation on the building structure
Section 1245 Property (Personal Property):
Accelerated depreciation from cost segregation and bonus depreciation
Recognized gain may be taxed at ordinary income rates
Applies to eligible Section 1245 assets identified in cost segregation; not all 15-year land improvements are Section 1245 property
Calculating the True Tax Impact
Bonus depreciation can accelerate deductions into earlier years while reducing the adjusted basis of qualifying assets. Upon disposition, some recognized gain may be taxed as ordinary income under depreciation recapture rules. The net tax result depends on the asset classification, sale proceeds, applicable tax rates, and timing of deductions and gains.
The benefit of bonus depreciation lies in:
Time value of money (tax savings now, tax payment later)
Potential bracket arbitrage (deduction at high bracket, recapture at lower bracket)
Reinvestment opportunity for saved tax dollars
Strategies to Mitigate Recapture Tax
Several approaches can reduce recapture impact:
1031 Exchange: Qualifying real-property exchanges may defer eligible gains and certain depreciation-related tax consequences. Personal property and partnership interests generally do not qualify.
Estate Planning: Inherited property generally receives a basis adjustment under current law, potentially eliminating pre-death depreciation recapture
Bracket Management: Time sales in lower-income years
Understanding these dynamics is essential for tax planning for real estate investors with significant depreciation claims.
The "Allowed or Allowable" Trap
A critical but often overlooked rule: investors who don't claim depreciation may still owe recapture tax on depreciation they could have claimed. Skipping the deduction for years means losing tax benefits during ownership while potentially facing recapture obligations at sale. Failing to claim allowable depreciation can increase taxable gain without providing the corresponding deductions during ownership.
Section 179 vs. Bonus Depreciation for Rental Property
Key Differences and Eligibility
Both Section 179 and bonus depreciation allow accelerated deductions, but they have distinct characteristics:
Bonus Depreciation (Section 168(k)):
Applies to all qualifying property regardless of amount
No income limitation
Can create or increase losses
Applies automatically unless elected out
Now permanent at 100%
Section 179:
2025 deduction limit: $2,500,000; phase-out begins at $4,000,000 in qualifying purchases
2026 deduction limit: $2,560,000; phase-out begins at $4,090,000 in qualifying purchases
2027 limits await official IRS publication
Cannot create or increase a business loss
Requires active trade or business status
When to Choose Section 179 for Rental Property
Section 179 has a significant limitation for rental property investors: it generally requires the rental to rise to the level of an actively conducted trade or business, and certain property leased to others by noncorporate taxpayers faces additional restrictions. Many individual landlords do not qualify.
However, Section 179 may be preferable when:
The property clearly qualifies as an active trade or business
You want to claim specific assets without affecting others
Bonus depreciation has been elected out for other tax reasons
For most rental property investors in 2027, bonus depreciation at 100% is the more straightforward and broadly applicable option.
IRS Rules and Compliance Requirements
Key IRS Publications
Several IRS resources govern rental property depreciation:
IRS Publication 946: Primary source for depreciation rules, MACRS tables, and bonus depreciation provisions
IRS Publication 527: Residential Rental Property guidance
IRS Form 4562: Required to claim depreciation, bonus depreciation, and Section 179 deductions
IRS Form 3115: Application for Change in Accounting Method (used for lookback studies)
Acquisition and Placed-in-Service Timing
Two dates matter for bonus depreciation eligibility:
Acquisition Date:
The date a written, binding contract is executed for the qualifying asset
The acquisition-date test concerns the specific property, not necessarily the overall real estate transaction
Placed-in-Service Date:
Property must be ready and available for its intended use
Qualifying components are evaluated separately for placed-in-service eligibility
Must occur in the tax year the deduction is claimed
Election Out Provisions
Taxpayers can elect out of bonus depreciation on a class-by-class basis (5-year, 7-year, 15-year property) and year-by-year. Elections must be made on a timely-filed tax return (including extensions) and are generally irrevocable.
Reasons to elect out might include:
Maximizing deductions in higher-bracket future years
State tax conformity issues
Passive loss limitations making current-year deductions unusable
State Tax Considerations: The Conformity Problem
Non-Conforming States
Not all states follow federal bonus depreciation rules. The most significant non-conformers include:
New York:
Does NOT conform to federal bonus depreciation
Requires full add-back of bonus deduction for state tax purposes
Combined NYC resident rate can reach 14.776%
Can reduce the state-level benefit of federal deductions
California:
Does NOT conform to federal bonus depreciation
Requires add-back similar to New York
Top state rate of 13.3%
Material state tax costs from bonus depreciation
States with partial or full decoupling may require separate depreciation schedules and calculations.
States Without General Individual Income Taxes
States without general individual income taxes generally do not impose individual state income tax on bonus depreciation deductions, although other state or local tax obligations may still apply:
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
For investors in Texas and other no-income-tax states, real estate investing offers bonus depreciation benefits without state-level income tax complications.
Planning for Multi-State Exposure
Investors with properties in multiple states need:
State-specific depreciation schedules tracking federal vs. state basis differences
Coordinating federal depreciation elections with each state's rules
Multi-state tax planning considering investor residency, not just property location
How mogul Supports Property-Level Tax Reporting
For investors seeking the tax benefits of rental property ownership without the complexity of direct property management, mogul offers a differentiated approach built by Goldman Sachs alumni with $10 billion in collective deal experience.
Tax Benefits Built Into the Model:
mogul's fractional ownership structure may provide yearly tax allocations, including depreciation deductions where applicable. mogul's partnership-taxed property LLCs generally provide Schedule K-1 reporting, which may include depreciation allocations and other tax items. The use of deductions depends on each member's tax circumstances.Institutional-Quality Property Selection:
With less than 1% of reviewed properties passing mogul's diligence process, investors access institutional-quality single-family rentals selected through rigorous analysis of market conditions, rental income, operating expenses, and projected returns. The selection process considers property-level financial and operating assumptions.Headache-Free Access to Real Estate Tax Benefits:
Traditional rental property ownership may involve cost segregation studies, depreciation schedules, and CPA coordination on passive loss limitations. mogul coordinates property-level tax reporting, generally providing K-1 documentation showing applicable allocations, which investors evaluate under their own tax circumstances without direct property management responsibilities.Risk Mitigation:
mogul offers up to $10,000 in coverage for qualifying first-year losses on eligible investments made during a new member's first seven days, measured after one year and subject to promotion terms. The promotion applies only to eligible losses under its terms and does not guarantee investment returns or tax benefits.
mogul has an 18.8% historical average annual IRR as of June 1, 2026, and a 12-20% target IRR range as of September 28, 2026. These measures are distinct, and neither guarantees future investment outcomes. The platform offers monthly distributions of available net rental income when operational, alongside potential property appreciation and tax advantages that depend on individual circumstances.
Disclaimer: The information provided in this guide is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult with a licensed professional before making any financial or investment decisions.
Frequently Asked Questions
Can I claim bonus depreciation if I use a property manager?
Yes. Using a property management company does not by itself affect your eligibility for bonus depreciation. However, it may impact your ability to claim real estate professional status or meet material participation tests for non-passive treatment. The depreciation deduction itself remains available when the property qualifies, regardless of management structure. The question is whether resulting losses can offset non-rental income or must be treated as suspended passive losses.
What happens if I sell a property before using all my suspended passive losses?
When you dispose of your entire interest in a passive activity in a fully taxable transaction to an unrelated party, any remaining suspended losses from that activity generally become fully deductible in the year of sale. This means suspended bonus depreciation losses that couldn't offset W-2 income during your holding period will reduce your gain (or increase your loss) when you sell. Qualifying released losses may offset nonpassive income, subject to other applicable tax limitations.
Does bonus depreciation apply to renovation costs on existing rental properties?
Renovation and improvement costs can qualify for bonus depreciation if they meet the Qualified Improvement Property (QIP) rules or fall into short-life property categories. Certain interior improvements to nonresidential real property made after the building is placed in service may qualify as 15-year QIP eligible for 100% bonus depreciation. For residential rentals, personal property components of renovations (new appliances, carpeting, fixtures) qualify for bonus depreciation, but structural improvements remain 27.5-year property.
How does the partnership or LLC structure affect my depreciation deductions?
In pass-through entities like LLCs taxed as partnerships, depreciation deductions flow through to individual investors proportionally based on their ownership percentage. You claim your share of the entity's depreciation on your personal tax return. The passive activity rules still apply at the individual level, meaning your proportional depreciation may create suspended losses if you don't have passive income to offset. The entity-level structure doesn't change the fundamental passive vs. non-passive classification for most investors.
Are there any situations where I should NOT claim bonus depreciation?
Several scenarios might warrant electing out of bonus depreciation: if you're in a low tax bracket now but expect significantly higher income in future years, maximizing deductions later could save more total tax. If you have no passive income and can't qualify for real estate professional status, large bonus depreciation deductions may simply create suspended losses with no immediate benefit. For properties in states like New York or California that don't conform to federal rules, the state tax cost of add-backs might outweigh federal benefits depending on your specific situation. Consult a tax professional to model your specific circumstances before electing out.